Navigant Research Blog

Despite the uncertainty created by the Sun Tax in Spain, the industry is growing again. According to the Spanish PV Union (UNEF), in 2017, the annual installed capacity increased by 145% thanks to new self-consumption facilities, growing from 55 MW in 2016 to 135 MW in 2017. This development has been driven by the high degree of competitiveness achieved by PV, the costs of which have reduced significantly in recent years.

Off-Grid DER Is Booming

Most of the growth in 2017 came from agricultural use and rural electrification. In most of these installations, distributed energy resources (DER) has an advantage as it competes with either high fuel costs in applications like water pumping that used diesel generators or, in the case of new rural facilities, with expensive grid expansion costs.

In this sector, the challenge now is to not to reduce the price, but to convince potential customers of the value DER installations can bring. For example, farming operations can reduce diesel consumption to power irrigation pumps by around 70% with the addition of a solar plus storage system, this type of installations have a payback of just a couple of years.

Commercial and Industrial Is Becoming Competitive

The introduction of variable demand charge on auto-consumption (the so-called Sun Tax) in Spain created the impression that distributed solar was doomed to fail as with this charge, installation would be too costly to operate. This impression has lingered although, with the lower cost of solar installations, a significant number of installations could be paid back in 5-7 years despite the variable demand charge payment. The local systems integrator Opengy, reported that 2017 was its best year since 2010, with around 18 MW in its project pipeline (compared to less than 10 MW in 2016 and 2015).

Residential Gaining Momentum

The residential market is also gaining momentum, although it is yet get significant numbers of installation in place. In the latest news from this segment, the challenger local energy supplier, Viesgo, announced in February 2018 a partnership with (the also challenger) Bigbank, to finance Viesgo’s customers that want to buy a DER system (that can include solar, storage, and even EVs). In this agreement, Bigbank offers a 6.95% credit to Viesgo customers, while Viesgo is in charge of installing and servicing the system and collect customer payments. This follows the news of sonnen and SOLARWATT, the German battery and shared energy platform providers, which both entered the market in the last 6 months.

In the Global DER Deployment Forecast Database report, Navigant Research analyses the global market for DER technologies and assesses key market and technology trends. Driven by these trends, Navigant Research estimates that Europe installed 29.1 GW of new DER capacity in 2017, generating $25.5 billion in revenue. Spain missed the mark of what DER can bring to a country, but the future looks sunnier.

While Spain is far from the leading DER market and local legislation is not especially welcoming to DER, the demand charge could be improved and the lack of a flexibility market limits the revenue streams DER could tap into. The country is finally waking up from its distributed generation nap and a combination of a better economy and better system economics are behind it. The utility-scale record low bids in last years’ tenders put renewables back in the front pages, this time with a positive note and word-of-mouth marketing about savings at the distributed level are creating a buzz. Once these trends consolidate, Spain could become the first European country to have a successful DER industry that does not rely on any type of incentive (direct or indirect) to thrive.

For a long time, Spain’s intent to launch a clean energy industry was resolute despite the mishaps that occurred after the financial crisis of 2008 and the effect of European fiscal deficits in 2009/2010. In fact, my career in the sector began thanks to a job posting that required engineering and Spanish knowledge (to cover the growing Spanish renewables market).

With the financial crisis, Spain’s renewable energy ambitions not only collapsed, but the industry was thrown into the fire as part of the political and economic post-crisis fallout. The country stopped any new installations and slashed already signed feed-in tariffs (FITs) while the public opinion also turned against the industry.

Blocking the Sun

On the distributed side, the country passed from a FIT to a de facto veto on installations, then to a model that taxes auto-consumption on installations that maintain a connection to the grid, formally known as the Royal Decree on Auto Consumption, colloquially known as the Sun Tax.

The Sun Tax has a fixed component that, in reality, is a demand charge. Each year, 75% of it is paid per kilowatt of installed capacity, and the remaining 25% is a variable component that is paid for each kilowatt-hour consumed by the owner (coming from the grid or owner’s system). The fees are set by the government each year and vary depending on location and the customer’s type of grid connection.

The Sun Tax Does Not Always Shine

The Sun Tax came into effect in October 2015, just as Spain prepared for its December 2015 general election. With the election in sight, the government moved into other matters and did not pass the necessary regulation to make the Sun Tax applicable in practice.

When the government failed to win a majority in the parliament, any possibility of passing the regulation collapsed. It took a second election and almost 11 months to form a new working government. While the government is still led by the Partido Popular—proponents of the Sun Tax—it does not hold a majority; therefore, other parties can block any attempt to pass the tax’s secondary regulation.

This has put the Sun Tax and the future of distributed energy resources (DER) in limbo. Any financial analysis of distributed generation in Spain that considers the tax would reduce the competitiveness of DER solutions against grid electricity, but there is no process to pay this charge to the government or utility. This put the industry on hold, as potential customers could not estimate if and when an installation would be paid back by the savings. But this is starting to change. Even in the worst case scenario, DER installations are becoming economically attractive. DER opportunities in Spain will be presented in the second part of this blog.

The intermittent nature of renewables is well established, though hard data on its impact is just now starting to become available. Germany, a world leader in wind and solar, is showing growing levels of curtailment (defined here as the reduction of otherwise scheduled electricity output). As the wind plus solar share of electricity grew from 10% to 26%, the share of curtailed (or wasted) wind plus solar energy grew from about 0.2% to around 1.8%. As seen on the chart below, since 2009, a consistent pattern has emerged relating curtailment to renewable penetration.

Growth of Renewables and Curtailment

Consider if the rest of the world followed this trend line through 2030. The 2016 Renewable Energy Roadmap (REmap) from the International Renewable Energy Agency (IRENA) outlines a feasible path to doubling the share of renewables by 2030. The 40 countries covered represent 80% of global energy consumption. Under the REmap scenario, 60% of global solar plus wind energy would come from countries generating between 20% and 30% of their electricity from such sources, comparable to Germany’s 26% in 2015.

If each country followed the curtailment trend established above, annual curtailment would amount to 128 TWh, or 0.4% of total global generation. This energy is worth $9 billion, assuming a value of $70/MWh, the estimated variable cost of a combined-cycle generator in the United States in 2030. Given the low cost of renewables and compared to the $1 trillion or more in annual savings projected by IRENA, the curtailment may be easily justified.

Caveats and Variations

Even if renewables grow that quickly, there are many caveats to this assessment. Curtailment occurs locally, a nuance that country-level analysis does not capture. Furthermore, there are vast variations among countries in geography, transmission infrastructure, generation mix, market structures, and other variables. Germany’s trailblazing growth has led to some specific growing pains that are being addressed, with major transmission upgrades being built to address the issue. Still, given the poor track record of curtailments in other places with less renewables, curtailment could even be higher. See approximate trends on chart.

China has curtailed 15% of its wind since 2011, worth over $6 billion at the rates above. The Electricity Reliability Council of Texas (ERCOT) cut curtailment from 17% (2009) to 0.5% (2014) with transmission upgrades and market reform, but with just 11% of generation from wind still did “worse” than Germany by not falling below the trend line. With curtailment data just starting to be collected in some regions and the feverish projected growth of renewables, this high-level approximation can outline the potential magnitude of curtailment.

So if $9 billion of energy is curtailed, what opportunities will emerge? The second part in this blog series will cover some of these potential options. Transmission upgrades and storage technologies have been getting a lot of coverage lately, but flexible generation technologies may be even more important to our clean energy future.